DISCUSSION PAPER SERIES

IZA DP No. 1253

Geographic Labour Mobility and Unemployment Insurance in Europe

Konstantinos Tatsiramos

August 2004

Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor

Geographic Labour Mobility and Unemployment Insurance in Europe

Konstantinos Tatsiramos
European University Institute and IZA Bonn

Discussion Paper No. 1253 August 2004

IZA P.O. Box 7240 53072 Bonn Germany Phone: +49-228-3894-0 Fax: +49-228-3894-180 Email: iza@iza.org

Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit company supported by Deutsche Post World Net. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author.

IZA Discussion Paper No. 1253 August 2004

ABSTRACT Geographic Labour Mobility and Unemployment Insurance in Europe

Conventional wisdom suggests that unemployment benefits create a stronger geographic attachment by lowering the willingness of the unemployed to accept job offers. We assess empirically the effect of benefits on geographic labour mobility using individual data from the European Community Household Panel for France, Germany, Spain, and the UK. Contrary to the conventional wisdom, we find that receiving benefits enhances mobility offsetting the negative effect of benefits on the incentives to move. We estimate binary choice panel data models controlling for unobserved heterogeneity using random and fixed effects. The results are invariant to the estimated model.

JEL Classification: Keywords:

J61, J65, C23, C25

geographic labour mobility, unemployment insurance, discrete choice panel data

Konstantinos Tatsiramos European University Institute Villa San Paolo Via della Piazzuolla 43 50133 Florence Italy Email: Konstantinos.Tatsiramos@iue.it

I wish to thank Andrea Ichino, Jan van Ours, Karl Schlag, and Francis Vella for valuable suggestions and comments. This paper has also benefited from discussions with Gosta Esping-Andersen, Ludovic Renou, and seminar participants at the European University Institute, Pompeu Fabra, the 2003 EEA Summer School in London, the 2004 ESPE Conference in Bergen, and the 2004 EPUNet Conference in Berlin. Any remaining errors are only mine. Financial support from the European University Institute, the Greek State Scholarship Foundation (IKY), and the CentER at Tilburg University as a Marie Curie Training Site under contract HPRN-CT-2000-00134, is greatly acknowledged.

Introduction

The purpose of this paper is to study the extent to which Unemployment Insurance Benets (UIB) aect geographic labour mobility, that is, the decision to accept a job that requires a residential move within a country. In the process of European integration geographic labour mobility has increased its importance as a mechanism to absorb regional shocks. This is the case because policy instruments such as ination dierentials and exchange rate realignments are not available in the monetary union. Moreover, attaining higher geographic mobility is considered as one of the ways to achieve the objective of full employment in Europe, as set out at the "Lisbon Strategy" (European Commission, 2001). Although this increased importance of geographic labour mobility has been recognised, it is a stylised fact that mobility rates in Europe are low. In particular, internal migration rates in 1995 measuring the ratio of gross ows to population are about 0.6 per cent in Spain, 1.2 per cent in Germany, 1.5 per cent in France, while they are much higher, around 2.4 per cent, in the UK and the US (OECD, 2000). Adjustment to regional shocks in Europe has mainly been achieved through changes of unemployment and participation rates and less through mobility (Decressin and Fatas, 1995; Jimeno and Bentolila, 1998). In contrast, in the US, regional labour mobility accounts for a large part of regional adjustment to regional shocks (Blanchard and Katz, 1992). Although the low mobility of workers across European countries can be attributed to cultural and linguistic dierences, these dierences cannot explain the low regional mobility rates within countries. Alternative explanations are focusing on institutional characteristics which are claimed to reduce the incentives to move. The most common one refers to the Unemployment Insurance (UI) system.1
Other explanations focus on labour market regulation such as wage coordination and employment protection legislation (EPL) (Bertola, 1999). Centralised wage negotiations tend to reduce regional wage dierentials which are necessary in order to compensate migrants for mobility costs and cost-of-living dierentials. Furthermore, labour market rigidities through the EPL imply lower job nding rates due to the increased
1

The standard result from the theory of job search suggests that unemployment benets increase the reservation wage and reduce the search eort exerted by benet recipients lowering the probability to nd a job (Lippman and McCall, 1979 ; Mortensen, 1977). Consequently, unemployment benets are considered to impede geographic mobility because of the stronger geographic attachment that the lower employment prospects create. In particular, Hassler et al. (2001) argue that the dierence in the generosity of unemployment benets between Europe and the US is able to explain the dierence in the mobility rates, where Europe is characterised by more generous benets and lower mobility. Theoretical work which is questioning the conventional wisdom regarding the disincentive eects of UI has emphasised the positive eect of benets on search eort. The argument suggests that the increased expenditures allowed when receiving benets may increase the productivity of the search process (e.g. Barron and Mellow, 1979; Tannery, 1983; Ben-Horim and Zuckerman, 1987). In this paper, we show that theoretically the eect of benets on geographic labour mobility is ambiguous under the assumption that unemployment benets relax the nancial constraints faced by the unemployed because of the costs associated with a move. There are two forces moving in opposite directions. On the one hand, benets reduce the opportunity cost of rejecting a job oer which makes the unemployed rejecting more often by choosing a higher reservation wage. On the other hand, higher benets relax the liquidity constraints which impede mobility making recipients more willing to accept a job oer which requires a move. From the empirical point of view, the argument that unemployment insurance deters mobility and that its generosity can be accounted for the low regional mobility in Europe has not been established empirically.2 This paper oers an empirical assessment of the
hiring and ring costs. This is expected to have an eect also on the employment prospects of the migrants. 2 The literature has focused on the relation between labour market status and geographic mobility showing that the unemployed are more likely to move relative to the employed. For instance, Da Vanzo (1978) for the US, Pissarides and Wadsworth (1989) for the UK, Antolin and Bover (1997) for Spain. Reviews of the literature on migration can be found in Greenwood (1997), and Herzog et al. (1993).

eect of UIB on geographical labour mobility in Europe employing individual data from the European Community Household Panel (ECHP) for the years 1994 to 2001. The ECHP is a survey based on a standardised questionnaire that involves annual interviewing of a representative panel of households and individuals in each EU country. The advantage of using the ECHP, in addition to providing longitudinal data, is that persons who move, form or join new households are followed up at their new location. Moreover, the standardised methodology and procedures yield comparable information across countries. The empirical analysis is based on a sample of males who are labour force participants for France, Germany, Spain, and the United Kingdom (UK). These countries are chosen because they have comparable size both in terms of population and geography and they provide dierent conguration of labour market institutions. In particular, France, Germany, and Spain, are characterised as more generous in terms of unemployment insurance compared to the UK. We estimate a binary choice model to identify the determinants of mobility accounting for endogeneity of the regressors with unobserved individual heterogeneity, following Chamberlain (1980). Due to the low inter-regional mobility rates we consider both intra and inter-regional moves. To distinguish between a move related to housing or personal reasons and a job related move, we dene as movers those who have moved and have obtained a new job. We nd that receiving unemployment benets does not create an adverse incentive eect on the probability to move for a new job. In statistical terms, there is no signicant dierence in the likelihood to move between recipients and non-recipients. The only exception is Germany, in which recipients are less likely to move relative to non-recipients. Although recipients face lower probabilities relative to non-recipients in Germany, the results are not compatible with the idea that a more generous UIB system lowers mobility. In particular, we nd that recipients face the lowest probability to move in the UK, which provides with the

least generous benets among the countries in the study. These results indicate, contrary to the conventional wisdom, that receiving benets enhances mobility osetting the negative eect of benets on the incentives to move. Related work by Ahn et.al. (1999), using Spanish data on the willingness to move for work (but not on actual individual migration), shows, as we do in our study, that there is no signicant dierence on migration willingness between recipients and non-recipients. Goss and Paul (1990), use information on unemployment benets and actual individual migration for a sample of heads of households from the PSID for the US. They also do not nd a signicantly dierent eect between recipients and non-recipients on the probability to move, although they nd that those recipients who are involuntarily unemployed are less likely to move , while those recipients who are voluntarily unemployed are more likely to move, relative to the non-recipients. The result for the involuntary unemployed is related to the probability of recall from the previous employer for the recipients of unemployment insurance, which reduces the incentives to move. The rest of the paper is organised as follows. Section 2, discusses the theoretical framework, while Section 3 describes the data and the institutional features of the countries used in the empirical analysis. The econometric methodology is discussed in Section 4 and the results of the empirical analysis in Section 5. The conclusions of the study are drawn in Section 6.

Theoretical Framework

Using the standard model of job search (see for example Lippman and McCall, 1979), we study the eect of unemployment benets on the exit rate from unemployment to a job which requires a move, allowing for a substitution eect between benets and mobility cost. Since mobility cost is binding only in the national market, we focus on job oers which require a move. 5

workers and to a benet bt for unemployed. The following standard assumptions are made:

We consider an innitely lived individual who maximises the discounted value of lifetime P income, E{ t yt }, where income at time t, yt , is equal to the wage rate wt for employed
t=0

Both the wage and the benet are constant over time. Unemployed can receive at most one wage oer w at each period t. The wage oer w is the realisation of a random variable w which is drawn from the known distribution F on [0, w] , with w denoting the maximum e attainable wage and F (w) = 1. Oers are assumed to arrive at an exogenous rate 1 > 0. Both the arrival rate and the distribution of oers are time invariant. An unemployed who has received a job oer with probability has the option either to accept the job and work at the specied wage w, or to reject and wait for a better oer in next period. If an oer is accepted then the job lasts forever, that is, no ring or quit is allowed. Accepting a job oer that requires a move involves some cost c(b), which is assumed to be a function of the benets, such that, c(0) = e > 0 and c0 (b) < 0, for b > 0. Thus, it is c We denote the value of accepting and being employed as
X t=0 _

assumed that the mobility cost is a decreasing function of the benets. For those receiving no benets the cost is equal to e. c

Va (x) =

t x c(b) =

x c(b) 1

(1)

which is an increasing function of the wage. In every period, an unemployed has income b, receives an oer with probability , and chooses the action that yields the highest value. With probability (1 ), the unemployed receives no oer and remains unemployed. The value of being unemployed is therefore dened by

Vr = b + {E{max[Va (w), Vr ]} + (1 )Vr } which can be written as 6

(2)

(1 )Vr = b +

wR

Zw

[Va (w) Vr ]dF (x)

(3)

where wR denotes the cuto strategy of the unemployed. The value of rejecting and remaining unemployed, Vr , is independent of the wage oer that has been received. The optimal reservation wage is derived by maximising equation (3) with respect to wR and is such that

Va (wR ) = Vr

(4)

That is, the optimal reservation wage is the wage at which the unemployed is indierent between accepting or rejecting an oer. Any wage oered which is higher than the reservation wage is accepted. Using equations (1) and (3), the optimal condition of equation (4) can be written as Zw
_

wR = b + c(b)(1 ) +

(w wR )dF (x)

(5)

wR

Using equation (5), we can do comparative statics by dening the function Zw

_

where b = c(b) and compute the partial derivatives c HwR = 1 +

H(wR , b, b, , ) = wR b b(1 ) c c

(w wR )dF (x)

wR

Hb = 1 (1 )c0 (b) S 0 Hc = (1 ) < 0 By the implicit function theorem we obtain that

[1 F (wR )] > 0 1

(6)

wR Hb Hc wR = = , and b HwR b c HwR

(7)

From equation (6), since HwR > 0 and Hc < 0, then

wR c

> 0. Therefore, higher

mobility cost, keeping benets xed, leads to higher reservation wage since the opportunity cost of rejecting any oer is lower. In other words, mobility cost makes unemployed more reluctant to accept a job oer. The eect of benets on the reservation wage is ambiguous and depends on the sign of Hb in equation (6). If

c0 (b) < 1/(1 ) or |c0 (b)| > |1/(1 )| then Hb > 0 and therefore,
wR b

(8)

< 0 since HwR > 0 from equation (6). That is, if benets

lower the mobility cost more than they increase the value of being unemployed, this leads to a lower reservation wage since the opportunity cost of rejecting an oer is increased. Thus, there are two forces moving in opposite directions. On the one hand, higher benets reduce the opportunity cost of rejecting a job oer which makes unemployed rejecting more often by choosing a higher reservation wage. On the other hand, higher benets reduce the mobility cost making the unemployed more willing to accept a job oer that requires a move by choosing lower reservation wages.

2.1

The Escape Rate from Unemployment

The escape rate from unemployment is dened as

q = [1 F (wR )] which is the product of the probability to receive an oer , and the probability to accept an oer 1 F (wR ). A higher reservation wage lowers the probability to accept a job oer 8

and the escape rate from unemployment. The standard case without mobility cost shows that benet recipients choose higher reservation wages, because of lower opportunity cost, leading to lower escape rate from unemployment. In other words, when c0 (b) = 0 in equation (6), then
wR b

> 0 and qb < qnb , where qb and qnb refer to the exit rate for recipients and

non-recipients, respectively. In the presence of mobility cost, the reservation wage is expected to be higher for both recipients and non-recipients in order to compensate for the mobility cost, as shown in equation (7) since
wR c

> 0. For the benet recipients, assuming that c0 (b) < 0, the increase

of the reservation wage due to the mobility cost will be lower than the one for non-recipients increasing their exit rate from unemployment and thus enhancing labour mobility. That is, the disincentive eect of benets is partially oset. When equation (8) holds, recipients have lower reservation wage than non-recipients and qb > qnb . That is, the exit rate from unemployment for recipients is higher than the one for non-recipients. In this case, the disincentive eect of benets on the decision to accept a job is totally reversed.

Data Description

The empirical analysis is based on individual data from the eight waves of the European Community Household Panel (ECHP) for the years 1994-2001. The ECHP is a survey based on a standardised questionnaire that involves annual interviewing of a representative panel of households and individuals in each country covering a wide range of topics: demographics, employment characteristics, housing, education, income, etc. In the rst wave, a sample of some 60,500 nationally represented households - approximately 130,000 adults aged 16 years and over - were interviewed in the then 12 Member States. There are three characteristics that make the ECHP relevant for this study. Namely, the simultaneous coverage of employment status and housing situation, the standardised methodology and procedures yielding comparable information across countries and the longitudinal design in which information 9

on the same set of households and persons is gathered. The advantage of using the ECHP, in addition to providing longitudinal data, is that persons who move, form or join new households, are followed up at their new location. These features allow a European cross-country comparative study of geographic mobility. The sample consists of males who are labour force participants between 20 and 65 years old. Labour force participants are dened as those who are employed and those who are not employed, but looking for a job. Information on geographic mobility is obtained from the questions about the year and the month of moving in the current address and the geography of the move. That is, whether it was a move to the current address from another place within the locality or area, or a move from another area of the country. Due to the low inter-regional mobility observed in most European countries we consider both intra and inter-regional moves. However, by doing so, we combine moves which are related to dierent reasons, such as housing, personal, or job related reasons. Since our focus is on geographic labour mobility, we dene a mover as an individual who has moved within or outside his locality or area starting a new job. The dependent variable is therefore binary, taking the value of 1 if an individual has moved with a new job within the year between two consecutive waves, and 0, otherwise. It is important to distinguish between the causes and the consequences of a move. Being unemployed or married, may result in a change of residence but can also be the consequence of a change of residence. Therefore, the information for the explanatory variables is obtained from the wave preceding the year of the move. The countries studied are France, Germany, Spain, and the UK. This choice is based on geographic, demographic, and institutional reasons. Concerning geography and demographics, these countries are of comparable size both in terms of population and regions. Concerning institutions, these countries are characterised by a dierent degree of labour market exibility and dierent rules regarding UIB provision. Sample statistics and a description of the characteristics of the UI system for each country

10

are presented in the following subsections.

3.1

Descriptive Statistics

Table (A1) in the Appendix, contains the descriptive statistics of the sample. Regarding the labour market status of the individuals, 9.74 per cent are unemployed in the total sample, with Spain having the highest rate, 14 per cent, and the UK the lowest, 5.87 per cent. Moreover, 43 per cent of these unemployed are receiving unemployment compensation in the total sample. Across countries, the share of unemployed with benets varies from 54.36 per cent in Germany and 46.88 per cent in France, to 37.67 per cent in the UK and 34.27 per cent in Spain. Education varies also across countries, with Spain having the highest share of low educated, while the UK has the highest share of individuals having nished higher education. Home ownership rates in the sample reect the situation in the housing market of each country, with Spain and the UK having the highest ownership rates, while Germany has the highest share in the rental market. Table (A2), shows mobility rates by country. Columns (1), (3), and (4), are constructed using the ECHP for dierent denitions of mobility, while Column (2), shows the gross ows of regional mobility for each country using data from the OECD (2000). The two sources of mobility rates are not perfectly comparable since they are based on dierent denitions and refer to dierent years in some cases. Nevertheless, it appears that the mobility rates obtained from the ECHP follow the same pattern with the aggregate ow data in Column (2). That is, mobility rates are lower in Spain compared to France, Germany and the UK, with the latter exhibiting the highest mobility rates. However, as discussed above, due to the low regional mobility rates experienced by these countries we will focus the analysis on all the moves combined with the start of a new job, as they appear in Column (4). Table (A3), presents mobility rates by country and by individual characteristics for movers with a new job. The characteristics refer to the wave before the move took place.

11

Column (1), shows that 1.19 per cent of those employed last year have moved within the next year and obtained a new job, while the mobility rate for the unemployed is 2.63 per cent. The unemployed have higher mobility rates relative to the employed in all countries, as can be seen from Column (2)-(6). Mobility rates by benets status for the unemployed are depicted in the next two rows of Table (A3). For the total sample in Column (1), the mobility rate for benet recipients is 2.67 per cent relative to 2.59 per cent for non-recipients. Mobility rates for recipients are higher relative to non-recipients in France and Spain, and lower in Germany and the UK. Regarding the other characteristics, married and those having children have lower mobility rates, while higher educated are more mobile. Mobility rates drop as people age. Finally, home owners have lower mobility rates relative to renters.

3.2
3.2.1

Description of Labour Market Institutions

The Unemployment Insurance System

The key features of the UI system are the amount and the duration of benets. There is a distinction between UI and Unemployment Assistance (UA). When an individual is either not eligible or no longer eligible for UI, he or she may seek UA benets. UK has the lowest replacement ratios of UI, as can be seen in Table (A4). The unemployment benet in the UK is a at rate covering 30 per cent of the average wage. The replacement rate for France, Germany, and Spain, is more than double relative to the UK. From Table (A5), the payment of UA is at in France, Spain, and the UK, and 53 per cent of previous wage in Germany, while in all countries UA is means-tested. Eligibility conditions for both UI and UA vary across these countries in terms of the length of previous employment. Duration for UI varies by employment record (France, Germany and Spain), and/or by age (France and Germany). France has the highest UI benet duration (up to 60 months). Duration of UA is indenite in France, Germany and the UK, while it is provided only for 12

6 months in Spain. 3.2.2 Other Institutions

Apart from the UI system, there are other labour market institutions which may have an eect on mobility incentives, such as the employment protection and wage negotiations. Table (A7), presents an index of employment protection and an index on centralization of wage negotiations. The labour market in Spain is regarded as the most regulated in terms of employment protection regulations, with the UK being the most exible. In terms of centralisation, Germany has the most centralised wage bargaining system. Overall, the pattern that emerges from these characteristics indicates that the UI system is more generous in France, Germany, and Spain, relative to the UK both in terms of the level and the duration of the benets, and that the former countries impose more strict regulations in the labour market.

Empirical Methodology

The econometric model is a discrete choice model in which the dependent variable yit is binary, where i = {1, 2, ...N } refers to the individual and t = {1, 2...T } refers to the year.
We assume there is an underlying response variable yit dened by the regression relationship

yit = Xit + ci + it

(9)

where Xit is the vector of individual and household characteristics, and ci is the unobserved
individual eect which is time invariant. In practice, yit is unobserved. What we observe is the dummy variable yit which equals to 1 whenever yit 0, and to zero, otherwise. The latent variable yit can be thought as the expected gain from moving during the time period

[t 1, t] in order to obtain a new job compared to not moving. When the expected gain is positive then we observe a move, that is, yit = 1. 13

We estimate two models which dier in their assumptions about the correlation between the unobserved eect ci and the covariates Xit . Following Chamberlain (1980), assuming that ci follows a conditional normal distribution with linear expectation and constant variance we allow the unobservable variables to be correlated with some elements of Xit (Random eect probit estimator). A Mundlak (1978) version of this model assumes that ci |Xi Normal ( + Xi , 2 ), where Xi is the average of Xit , t = 1, ...T, and 2 is the variance of i in the equation ci = + Xi + i .3 Assuming the unobserved individual characteristics are xed for each individual, it is possible to obtain a consistent estimator of without any assumptions about how ci is related to Xi (Fixed eect logit estimator). If the probability to move given the observed and unobserved characteristics follows the logistic distribution, then conditioning the likelihood of a sequence of moves for an individual on the total number of periods that the individual has moved results in eliminating ci . Maximising this conditional version of the likelihood function eliminates their eect and provides with unbiased and consistent estimates (Chamberlain, 1980).

Empirical Analysis and Results

Each model is estimated separately by country and by pooling the individual observations for each country. In the pooled estimation we interact the labour market status variables with country dummies. This will provide estimates for the eect of receiving benets in each country on the probability to move relative to the average employed individual in the sample, restricting the eect of the other characteristics to be constant across countries. The information regarding the labour market status contains a dummy for being unemployed, a dummy for receiving benets and the unemployment duration of the unemployed. Other
In practice, this model is a Random eect probit including as regressors the mean values of the timevarying covariates. [For a detailed discussion, see Wooldridge, (2002)]
3

14

regressors included refer to individual and household characteristics, such as, age, level of education, type of housing tenure, spouses labour market status for those married, the number of children, year and regional dummies. In the pooled sample, a set of country dummies are also used in order to capture country specic eects. A detailed description of the variables can be found in the Appendix.

5.1

Empirical Results

Estimated coecients and standard errors from the random eect probit model (RE) by country are presented in Table (1). Starting from the individual characteristics, higher education has a positive and signicant eect on the probability to move in all countries except for Spain, in which the eect is not signicantly dierent from zero. This eect of higher education may be justied by the fact that high educated individuals have access to the national labour market compared to low skilled who tend to search more into the local labour market. Cultural and linguistic regional dierences in Spain are particularly important which may explain the insignicant eect for Spain. The eect of age shows that young individuals move more and old move less than the prime age workers, which is the reference group. Turning to the household characteristics, home owners are less likely to move compared to renters in Germany, Spain and the UK conrming the hypothesis suggested by Oswald (1997), which states that owners are less mobile due to the costs associated with buying and selling their home. For France, the eect is positive but not signicant. Those having a spouse, independently of her labour market status, are less likely to move compared to single individuals, while the eect of each additional kid lowers the likelihood to move for a new job. The parameters for the labour market status show that unemployed in Germany, Spain and the UK, are signicantly more likely to move relative to the employed. For France

15

the eect is not signicantly dierent from zero. The eect of receiving benets on the probability to move diers across countries. In particular, it is negative for Germany and the UK, and positive for France and Spain. Testing the statistical signicance of the coecient of receiving benets, we fail to reject the hypothesis that it is dierent from zero in France, Spain, and the UK, but it is rejected for Germany. That is, unemployment benets do not create an adverse eect on the probability to move, except for Germany. Parameter estimates from the xed eect model (FE) shown in Table (2) are similar with the results from the random eect model.4 The only dierence observed is that the positive eect of receiving benets in France on the probability to move is signicantly dierent from zero, but only at the 10 per cent signicance level in the xed eect model. Table (3), presents the estimates from pooled country estimations for both models. Column (1) includes dummies for the unemployment status and for receiving benets for the RE model, and Column (3) for the FE model. In Column (2) and Column (4), we report the coecients from the interaction of the unemployment and benet dummy with country dummies. For the specication without country dummies, both the RE and the FE results indicate that unemployed are more likely to move relative to the employed, while unemployment benets have a negative but not signicant eect. From the specication with the country dummies, the results for the eect of unemployment and benets on the probability to move are similar with the ones obtained from the estimations by country in Table (1) and Table (2). That is, recipients are more likely to move compared to non-recipients in France and Spain, while the opposite holds for the UK and Germany, with the eect for Germany being signicantly dierent from zero.

5.1.1

Predicted Probabilities

To obtain a size of the eect of benets on the likelihood to move we compute the predicted probabilities. The predicted probabilities are based on the estimates from the random eect
4

Characteristics which are time invariant, such as education, are not identied in the xed eect model.

16

probit model using a pooled country sample.5 In Table (4), the rst row refers to the predicted probability for the reference person, while the following rows contain the predicted probabilities for an individual who has the same characteristics as the reference person except the characteristic of the corresponding row. The reference person is an employed, aged 30-44 years old, single, without children, renter, who is living in the East of France in 1999. The probability of moving with a new job for the reference individual is 5.13 per cent. The probability for individuals with the same characteristics as the reference person who are unemployed for 6 months without benets are 5.91 per cent in France, 22.8 per cent in Germany, 10.64 per cent in Spain, and 12.85 per cent in the UK. The corresponding probabilities for unemployed with benets are 10.5 per cent in France, 15.81 per cent in Germany, 12.68 per cent in Spain, and 10.75 per cent in the UK. Unemployed in France have on average the lowest probability to move compared to the rest of the countries, which is mainly due to the low mobility probabilities for those without benets. In France and Spain, recipients face a higher probability to move relative to non-recipients. The opposite holds for Germany and the UK. Although recipients face lower probabilities relative to non-recipients in Germany, the results are not compatible with the idea that a more generous UIB system is associated with lower mobility. If this was the case, we would expect the mobility probability for recipients in the UK, which has the least generous UI system, to be the highest among the recipients of the other countries which are characterised by more generous UI systems. However, recipients in the UK face the lowest probability to move. Column (2) and Column (3), show the probabilities for unemployed with 12 and 24 months of unemployment, respectively. The probability to move declines with unemployment duration. This decline is very small for France, Germany, and Spain. In the UK, unemployed with 12 months experience a decline of around 10 per cent in the probability to
We report the probabilities from the pooled sample estimates in order to make comparisons across countries based on the same estimation. Predicted probabilities based on the estimates by country provide a similar picture since the results do not dier qualitatively between the two estimations.
5

17

move compared to those with 6 months of unemployment.

Conclusions

In this paper, we provided an empirical assessment of the eect of unemployment benets on geographic labour mobility in Europe using individual data from the ECHP. The analysis was based on a sample of males who are labour force participants from France, Germany, Spain, and the UK. We have found that unemployment benets do not create an adverse incentive eect on the probability to move. In statistical terms, there is no signicant dierence in the likelihood to move between recipients and non-recipients. The only exception is Germany, in which recipients are less likely to move relative to non-recipients. Although recipients face lower probabilities relative to non-recipients in Germany, the results are not compatible with the idea that a more generous UIB system is associated with lower mobility. In particular, we found that recipients face the lowest probability to move in the UK, which provides with the least generous benets among the countries in the study. These results indicate, contrary to the conventional wisdom, that receiving benets enhances mobility osetting the negative eect of benets on the incentives to move. Concerning other important determinants of mobility, the results conrm previous ndings in the literature. In particular, higher education enhances mobility, young individuals are more likely and older ones are less likely to move relative to the prime aged, while home ownership, being married, and the number of kids deter mobility. The exact mechanism through which unemployment benets enhance mobility incentives cannot be identied within our analysis. Theoretical work questioning the conventional wisdom regarding the disincentive eects of benets has emphasised the positive eect of benets on search eort. In particular, it suggests that the increased expenditures allowed when receiving benets may increase the productivity of the search process. Our suggestion 18

is that the ability to cover search and mobility costs related to a move when receiving benets increases the employment opportunities from distant locations.

References
Ahn N, de la Rica S, Ugidos, A (1999) Willingness to move for work and unemployment duration is Spain. Economica 66:335-57. Antolin P, Bover O (1997) Regional migration in Spain: the eect of personal characteristics and of unemployment, wage and house price dierentials using pooled cross sections. Oxford Bulletin of Economics and Statistics 59 (2):215-235. Atkinson A, Micklewright J (1991) Unemployment Compensation and Labor Market Transitions: A Critical Review. Journal of Economic Literature XXIX:1679-1727. Barron J, Mellow W (1979) Search eort in the labour market. Journal of Human Resources 14:389-404. Ben-Horim M, Zuckerman D (1987) The eect of unemployment insurance on unemployment duration. Journal of Labour Economics 5(3):386-390. Bertola G (1999) Labor Markets in the European Union. Background paper for a Lecture at EALE 1999 (Regensburg). Blanchard O, Katz L (1992) Regional evolutions. Brookings Papers on Economic Activity 1:1-74. Chamberlain G (1980) Analysis of Covariance with Qualitative Data. Review of Economic Studies 47:225-238. Da Vanzo J (1978) Does Unemployment Aect Migration? Evidence from Micro Data. The Review of Economics and Statistics 60(4):504-514. Decressin J, Fatas A (1995) Regional Labor Market Dynamics in Europe. European Economic Review 39:1627-55. European Commission (2001) High Level Task Force on Skills and Mobility, Final report, Brussells. Goss E, Paul C (1990) The impact of unemployment insurance benets on the probability of migration of the unemployed. Journal of Regional Science 20:349-58. Greenwood MJ (1997) Internal migration in developed countries. In Rosenzweig MR, Start O (eds), Handbook of Population and Family Economics, Elsevier, North-Holland, Amsterdam, 647-720. Hassler J, Mora J, Storesletten K, Zilibotti, F (2001) A positive theory of geographical mobility and social insurance. CEPR Discussion Paper, No. 2964. 19

Herzog HW Jr, Schlottmann AM, Boehm TP (1993) Migration as Spatial Job-Search: A Survey of Empirical Findings. Regional Studies 27:327-340. Jimeno JF, Bentolila S (1998) Regional Unemployment Persistence (Spain, 1976-1994). Labour Economics (5)1:25-51. Lippman SA, McCall JJ (1979) Studies in the Economics of Search. North Holland, Amsterdam. Mortensen D (1977) Job Search, the duration of unemployment and the Phillips curve. Industrial and Labor Relations Review 30:505-517. Nickell SJ, Layard R (1999) Labor Market Institutions and Economic Performance. In: Ashenfelter O, Card D (eds) Handbook of Labor Economics, vol. 3. North-Holland, Amsterdam, 3029-84. Oswald A (1997) Theory of homes and jobs. University of Warwick, mimeo. OECD (1996) Employment Outlook, OECD, Paris. OECD (2000) Employment Outlook, OECD, Paris. Pissarides C, Wadsworth J (1989) Unemployment and the inter-regional mobility of labour. The Economic Journal 99:739-755. Tannery F (1983) Search eort and unemployment insurance reconsidered. Journal of Human Resources 18:432-440. Wooldridge JM (2002) Econometric Analysis of Cross Section and Panel Data. MIT Press, Cambridge, MA.

20

Table 1. Random eect probit estimates by country. Coecients and standard errors
France Labour Market Status Unemployed Receiving benets Unemployment duration Spouses Labour Market Status Unemployed Employed Inactive Number of kids Education Third level 2nd level of secondary Age Groups 20-24 24-29 45-54 55-65 House Ownership Constant Log-Likelihood ln a .495 (.113)*** .282 (.076)*** -.635 (.128)*** -1.06 (.323)*** .172 (.136) -2.12 (.150)*** -.981.57 -1.97 (.545) .372 (.101) .121 (.058) 4678 .247 (.093)*** .129 (.065)** -.233 (.071)*** -.768 (.132)*** -.522 (.112)*** -2.12 (.131)*** -1658.16 -2.25 (.491) .323 (.079) .094 (.042) 5400 .220 (.100)** .211 (.074)*** -.422 (.114)*** -.990 (.238)*** -.326 (.109)*** -2.05 (.170)*** -1050.82 -2.25 (.765) .324 (.124) .095 (.065) 6281 .547 (.079)*** .247 (.069)*** -.516 (.093)*** -.704 (.131)*** -.087 (.098) -1.37 (.146)*** -1588.90 -1.82 (.331) .400 (.066) .138 (.039) 3618 .333 (.082)*** .053 (.084) .207 (..085)*** .129 (.070)* .060 (.075) -.139 (.081)* .153 (.062)** .143 (.079)* -.314 (.183)* -.401 (.155)*** -.443 (.184)** -.279 (.068)*** -.267 (.128)** -.298 (.106)*** -.414 (.157)*** -.266 (.055)*** -.784 (.158)*** -1.01 (.150)*** -1.05 (.154)*** -.563 (.053)*** -.733 (.258)*** -.389 (.107)*** -.326 (.135)** -.448 (.053)*** -.030 (.223) .375 (.257) -.001 (.013) .935 (.141)*** -.269 (.142)* -.002 (.007) .433 (.166)*** .078 (.174) -.001 (.007) .536 (.198)*** -.053 (.238) -.010 (.012) Germany Spain UK

a N

Notes: ***, **, and *, denote signicance at the 1%, 5% and 10% level, respectively. Each estimation includes year and regional dummies and the mean values of time varying covariates. The reference groups include: employed, single with no kids, low education level, age 30-45, renters.

21

Table 2. Fixed eect logit estimates by country. Coecients and standard errors
France Labour Market Status Unemployed Receiving benets Unemployment duration Spouses Labour Market Status Unemployed Employed Inactive Number of kids Age Age squared House Ownership Log-Likelihood Sample Size -.497 (.421) -.641 (.376)* -.820 (.451)* -.453 (.155)*** -.051 (.233) -.0002 (.003) .406 (.281) -260.46 885 -.446 (.299) -.487 (.225)** -.858 (.387)** -.583 (.139)*** .479 (.153)*** -.008 (.002)*** -.722 (.249)*** -485.28 1772 -1.26 (.397)*** -1.99 (.414)*** -1.89 (.393)*** -1.16 (.172)*** .394 (.262) -.006 (.003)* -.680 (.250)*** -243.21 1060 -1.21 (.563)** -.603 (.226)*** -.540 (.296)* -.740 (.119)*** -.085 (.122) .001 (.001) -.151 (.187) -479.87 1929 -.326 (.473) 1.09 (.605)* .010 (.036) 1.93 (.346)*** -.719 (.324)** -.012 (.019) 1.00 (.394)** -.118 (.423) -.004 (.016) 1.38 (.439)*** -.276 (.530) -.044 (.032) Germany Spain UK

Notes: *, ** and *** denote signicance at the 1%, 5% and 10% level, respectively. Each estimation includes year dummies.

22

Table 3. Random eect probit and xed eect logit estimates for pooled country sample. Coecients and standard errors
Random Eect Probit (1) (2) Labour Market Status Unemployed Receiving benets Unemployment duration Country Interaction Dummies Unemployed*France Unemployed*Germany Unemployed*Spain Unemployed*UK Receiving Receiving Receiving Receiving Un. Un. Un. Un. benets*France benets*Germany benets*Spain benets*UK .549 (.084)*** -.00004 (.090) -.003 (.004) .077 (.214) .906 (.139)*** .395 (.162)** .574 (.187)*** .308 (.249) -.257 (.143)* .103 (.171) -.106 (.229) -.001 (.012) -.003 (.007) -.001 (.007) -.012 (011) -.415 (.078)*** -.462 (.059)*** -.528 (.075)*** -.400 (.027)*** .131 (.035)*** .045 (.035) .379 (.045)*** .222 (.034)*** -.404 (.045)*** -.784 (.079)*** -.417 (.078)*** -.465 (.059)*** -.532 (.075)*** -.398 (.027)*** .131 (.035)*** .043 (.035) .384 (.045)*** .220 (.034)*** -.405 (.045)*** -.791 (.079)*** .148 (.079)* -.002 (.001)** -.203 (.054)*** -1.90 (.064)*** -5491.18 -2.00 (.219) .366 (.040) .118 (.022) 19997 -.205 (.055)*** -1.90 (.066)*** -5473..01 -2.03 (.224) .361 (.040) .115 (.023) 19977 -.287 (.110)*** -1581.58 .150 (.080)* -.002 (.001)** -.291 (.111)*** -1573.94 -.694 (.180)*** -.767 (.131)*** -.944 (.174)*** -.742 (.065)*** Fixed Eect Logit (3) (4) 1.06 (.188)*** -.083 (.203) -.008 (010) .034 (.442) 1.72 (.343)*** .829 (.345)** 1.39 (.398)*** .976 (.587)* -.628 (.325)* .075 (.395) -.380 (.488) .001 (.035) -.009 (.020) -.004 (.015) -.042 (.028) -.693 (.181)*** -.771 (.132)*** -.962 (.175)*** -.745 (.066)***

duration*France duration*Germany duration*Spain duration*UK

Spouses Labour Market Status Unemployed Employed Inactive Number of Children Education Third level 2nd level of secondary Age Groups 20-24 24-29 45-54 55-65 Age Age squared House Ownership Constant Log-Likelihood ln a

a N

1037

1037

Notes: ***, ** and * denote signicance at the 1%, 5% and 10% level, respectively. The RE estimation includes regional and year dummies and the mean of time varying covariates. The FE estimation includes year dummies.

23

Table 4. Predicted mobility probabilities from the random eect probit model (Pooled sample)
Reference person 5.13 6 months unemployed Labour market status Benets*France No Benets*France Benets*Germany No Benets*Germany Benets*Spain No Benets*Spain Benets*UK No Benets*UK 10.50 5.91 15.81 22.8 12.68 10.64 10.75 12.85 5.13 12 months unemployed 10.36 5.82 15.34 22.22 12.48 10.47 9.41 11.33 5.13 24 months unemployed 10.08 5.64 14.43 21.07 12.10 10.13 7.11 8.67

Notes: The reference person is an employed, aged 30-44 years old, single, without children, who is in a rented, or in a rent free house and lives in a country and region with similar characteristics as the Est of France in 1999.

24

Appendix: Descriptive Statistics and Institutions

Table A1. Descriptive statistics. Total sample and by country
Total Labour market status Employed Unemployed With benetsa Without benetsa Spouses Labour market status Unemployed Employed Inactive Having no children Education Third level 2nd level of secondary Less than 2nd level Housing Tenure Owner Renter Free Rent Mean of Age
Note: a Source: ECHP, Authors calculations

France

Germany

Spain

UK

90.26 9.74 43.0 57.0

93.87 6.13 46.88 53.12

89.05 10.95 54.36 45.64

86.0 14.0 34.27 65.73

94.13 5.87 37.67 62.23

8.45 39.34 23.93 30.32

7.24 47.41 22.11 31.19

13.01 43.45 16.31 34.72

9.33 22.78 35.09 17.11

1.81 47.94 20.76 42.48

29.10 33.23 37.68 65.29 30.71 4.00 40.32

24.96 36.90 38.14 60.03 35.02 4.95 40.95

25.02 57.68 17.30 42.36 55.41 2.23 40.70

22.13 19.20 58.67 82.94 10.64 6.42 39.90

50.55 13.35 36.10 79.38 18.73 1.89 39.63

Percentage of the unemployed with or without benets.

Table A2. Mobility rates by country (various denitions)

Inter-regionala % France Germany Spain UK 1.55 (323) 0.66 (172) 0.38 (99) 3.68 (640) Gross Flowsb % 1.49 1.24 0.60 2.30 Inter-regionala with new job 0.38 (79) 0.20 (51) 0.12 (32) 0.94 (163) Inter&Intra-regional with new joba % 1.01 1.36 0.86 2.37 (211) (354) (225) (412)

a Notes: Percent of movers from ECHP and number of moves in parenthesis. Source: Authors calculations. b Ratio of gross ows to population (1995 for France and Italy, 1993 for Germany, 1994 for Spain, and 1998 for the UK) from Table 2.12, OECD (2002)

25

Table A3. Mobility Ratesa by country and characteristics

Total Labour market status Employed Unemployed With Benetsb Without Benetsb Spouses Labour market status Unemployed Employed Inactive Having children No children Education Third level 2nd level of secondary Less than 2nd level Age Groups 20-24 25-29 30-44 45-54 55-65 Housing Tenure Owner Renter
Note: a All moves with new job. b Source: ECHP, Authors calculations.

France 0.91 2.50 2.65 2.33 1.46 0.73 0.63 0.68 1.75

Germany 1.09 3.59 3.43 3.78 1.27 1.09 0.52 0.94 2.16

Spain 0.75 1.59 1.68 1.54 0.95 0.56 0.35 0.48 2.72

UK 2.28 3.82 3.38 4.08 1.58 1.61 1.60 1.41 3.66

1.19 2.63 2.67 2.59 1.22 1.02 0.65 0.80 2.56

1.61 1.33 1.11 3.56 3.04 1.30 0.43 0.21 0.81 2.39

1.67 0.84 0.74 3.82 3.26 0.93 0.15 0.05 0.46 1.90

1.15 1.48 1.29 3.03 2.75 1.45 0.78 0.24 0.49 2.04

1.04 0.78 0.82 1.46 2.07 0.94 0.23 0.06 0.61 2.53

2.29 3.23 2.15 6.80 4.71 2.06 0.64 0.57 1.69 4.88

Percentage of the unemployed with or without benets.

Table A4. The unemployment insurance benets system (UI)

Employment Conditions Replacement Rate

France Germany Spain United Kingdom

4 months in the last 8 months 360 days in 3 years 12 months in 6 years -

75 60 70 30a

Source: Table 2.2, OECD (1998), Benets Systems and Work Incentives. a From Table 2.1 OECD Employment Outlook (1996), Chapter 2. Applies to a 40-year -old single worker who started work at 18. The replacement rate is expressed as a percentage of previous gross earnings except in Germany where payments are expressed as a percentage of net income.

26

Table A5. The unemployment assistance benets system (UA)

Employment Conditions Replacement Rate Income/assets test

France Germany Spain United Kingdom

Exhausting UI and 5 years in the last 10 years Exhausting UI and 6 months in the last year Exhausting UI, or to have worked 6 months -

at 53 at at

Fam/Inc Fam/Inc Fam/Inc Fam/Inc/As

Source: Table 2.3, OECD (1998), Benets Systems and Work Incentives and Table 2.3,OECD (2002), Benets and Wages. Applies to a 40-year -old single worker with a long employment history, previously earning an average income. Fam: Income test includes all family income; Inc: Test for income only; As: a certain level of assets also disqualies for UA benets

Table A6. Duration of UI and UA benet entitlements in 1996

France: maximum of 27 months insurance (depending on age and employment record) and then maximum of 33 months at declining rate every 4 months followed by the Allocation de solidarite specique (unlimited). Germany: 6-12 or 32 months (depending on age and employment record) followed by unlimited unemployment assistance. Spain: 4-24 months insurance (depending on contribution) reducing after 6 months followed by 6 months of unemployment assistance and then social assistance United Kingdom: 12 months insurance, then unemployment assistance
Source: OECD Employment Outlook 1996, chart 2.3

Table A7. Employment protection and wage bargaining indices

Employment Protectiona France Germany Spain United Kingdom 14 15 19 7 Centralisationb 7 12 7 6

a Source: Nickell&Layard (1999), Table 6&7. Country ranking with 20 as the most regulated. b A ranking of the centralisation of wage bargains with 17 being the most centralised

27

Description of the main variables

Labour Market Status Unemployed Receiving benets Unemployment duration Dummy equals 1 if unemployed and looking for a job, and 0 if employed Dummy equals 1 if unemployed and receiving benets, and 0 otherwise Months of unemployment at the time of the interview if unemployed

Spouses Labour market status Unemployed Employed Inactive Number of kids Education levels Higher level of education Medium level of education Lower level of education

Dummy equals 1 if spouse is unemployed, and 0 otherwise. Dummy equals 1 if spouse is employed, and 0 otherwise Dummy equals 1 if spouse is inactive, and 0 otherwise Number of kids in the household

Dummy for having nished higher education Dummy for having nished second level of secondary education Dummy for having nished less that second level of secondary education Dummy equals 1 for home owners

Home ownership

28